Content. 01 Report of the Treasurer on the Financial Statements. 02 Independent Auditor s Report. 04 Consolidated Statements of Financial Position

The Howard University Consolidated Financial Statements For Fiscal Years Ended June 30, 2018 and 2017

Content 01 Report of the Treasurer on the Financial Statements 02 Independent Auditor s Report 04 Consolidated Statements of Financial Position 05 Consolidated Statements of Activities 06 Consolidated Statements of Cash Flows 07 Consolidated Notes to the Financial Statements

Tel: 919-754-9370 Fax: 919-754-9369 www.bdo.com 421 Fayetteville Street Suite 300 Raleigh, NC 27601 Independent Auditor s Report Board of Trustees The Howard University Washington, DC Report on the Financial Statements We have audited the accompanying consolidated financial statements of The Howard University (the University ), which comprise the consolidated statement of financial position as of June 30, 2018 and 2017, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the University as of June 30, 2018 and 2017, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Report on Summarized Comparative Information We have previously audited The Howard University s 2017 consolidated financial statements, and we expressed an unmodified opinion on those consolidated financial statements in our report dated November 21, 2017. In our opinion, the summarized comparative information presented herein as of and for the years ended June 30, 2017 is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived. December 19, 2018

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands) June 30, 2018 June 30, 2017 Current Assets: Cash and cash equivalents $ 32,998 $ 28,900 Operating investments 39,940 39,851 Deposits with trustees 1,732 401 Receivables, net 89,771 89,730 Inventories, prepaids and other current assets 11,862 8,579 Restricted Investments 49,988 43,911 Total Current Assets 226,291 211,372 Long Term Assets: Deposits with trustees 13,386 15,058 Receivables, net 22,607 21,659 Inventories, prepaids and other noncurrent assets 18,420 22,695 Unexpended bond proceeds 3,117 3,038 Restricted investments 4,126 3,302 Endowment investments 688,562 646,556 Operating right of use assets 3,764 4,599 Finance right of use assets 56,085 25,930 Long-lived assets 510,261 517,955 Total Long Term Assets 1,320,328 1,260,792 Total assets $1,546,619 $ 1,472,164 Current Liabilities: Accounts payable and accrued expenses $ 131,804 $ 96,792 Deferred revenue 15,710 15,097 Other liabilities 15,206 13,581 Accrued post-retirement benefits 3,842 4,325 Reserves for self-insured liabilities 10,392 16,752 Operating lease obligations 211 251 Finance lease obligations 7,732 3,520 Bonds payable 11,200 12,101 Total Current Liabilities 196,097 162,419 Long Term Liabilities: Deferred revenue 4,495 762 Other liabilities 5,949 6,606 Accrued post-retirement benefits 44,599 50,670 Underfunded defined benefit pension plan 116,807 139,046 Reserves for self-insured liabilities 56,699 57,462 Operating lease obligations 3,637 3,848 Finance lease obligations 47,024 25,595 Bonds payable 397,444 398,865 Refundable advances under Federal Student Loan 6,333 6,341 Total Long Term Liabilities 682,987 689,195 Total Liabilities 879,084 851,614 Net Assets: Unrestricted 233,839 222,165 Temporarily restricted 291,409 265,935 Permanently restricted 142,287 132,450 Total Net Assets 667,535 620,550 Total Liabilities and Net Assets $ 1,546,619 $ 1,472,164 The accompanying notes are an integral part of these consolidated financial statements. 4

CONSOLIDATED STATEMENTS OF ACTIVITIES For the years ended June 30, 2018 (with summarized comparative information for fiscal year ended June 30, 2017) (in thousands) Unrestricted Temporarily Restricted Permanently Restricted June 30, 2018 Summarized June 30, 2017 Operating Revenues and reclassifications: Academic services: Tuition and fees, net $ 143,631 $ - $ - $ 143,631 $ 147,867 Grants and contracts 53,251 - - 53,251 53,763 Auxiliary services 37,445 - - 37,445 38,901 Clinical services: Patient service - Hospital, net 207,977 - - 207,977 231,499 Patient service - Faculty medical practice, net 23,047 - - 23,047 12,854 Patient service - Dental clinic, net 2,049 - - 2,049 1,972 Public support: Federal appropriation 226,439 3,405-229,844 221,821 Contributions 17,904 6,768 8,439 33,111 15,739 Endowment transfer 9,967 11,492 738 22,197 15,128 Operating investment income (loss) 4,541 - - 4,541 5,270 Real Property 20,535 - - 20,535 3,811 Other income 14,984-59 15,043 14,538 Total revenues 761,770 21,665 9,236 792,671 763,163 Net assets released from restrictions 10,523 (10,523) - - - Total revenues and reclassifications 772,293 11,142 9,236 792,671 763,163 Expenses: Program services: Instruction 180,761 - - 180,761 200,737 Research 41,928 - - 41,928 40,555 Public service 12,250 - - 12,250 11,079 Academic support 39,202 - - 39,202 36,441 Student services 35,562 - - 35,562 30,037 Patient care 254,327 - - 254,327 241,131 Total program services 564,030 - - 564,030 559,980 Supporting services: Institutional support 162,424 - - 162,424 169,186 Auxiliary enterprises 65,366 - - 65,366 65,635 Total supporting services 227,790 - - 227,790 234,821 Total operating expenses 791,820 - - 791,820 794,801 Income from defeased bonds - - - - 33,105 Operating revenues over (under) operating expenses (19,527) 11,142 9,236 851 1,467 Non-operating Investment income (loss) in excess of amount designated 31,406 27,323 467 59,196 80,705 Endowment transfer (8,973) (12,991) (233) (22,197) (15,128) Net unrealized gain in beneficial interest trust - - 367 367 513 Restructuring costs - - - - 118 Change in funded status of defined benefit pension plan 15,436 - - 15,436 32,753 Change in obligation for post-retirement benefit plan (6,746) - - (6,746) (100) Change in funded status of supplemental retirement plan 78 - - 78 107 Increase (decrease) in non-operating activities 31,201 14,332 601 46,134 98,968 Change in net assets 11,674 25,474 9,837 46,985 100,435 Net assets, beginning of year 222,165 265,935 132,450 620,550 520,115 Net assets, end of year $ 233,839 $ 291,409 $ 142,287 $ 667,535 $ 620,550 The accompanying notes are an integral part of these consolidated financial statements. 5

CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) June 30, 2018 June 30, 2017 Cash flows from operating activities Change in net assets $ $46,985 $ 100,435 Adjustments to reconcile change in net assets to net cash and cash equivalents provided by/(used in) operating activities: Depreciation and amortization 39,814 50,154 Bonds defeased - (33,105) Bond discount amortization 221 223 Bonds issuance costs 255 254 Net realized gain on sale of investment (39,755) (47,384) Unrealized (gain) loss on investments (23,982) (38,591) Donated long-lived asset (12,727) - Loss (gain) on sale/disposal of long-lived assets (16,306) 1,210 Change and/or remeasurement of leases - 2,714 Change in deposits with trustees 341 (808) Change in receivables (excluding notes) (8,059) 105,464 Change in allowance for doubtful receivables 5,671 6,743 Change in inventory, prepaid expenses and other assets 991 3,347 Change in Operating right of use assets 835 (641) Change in accounts payable and accrued expenses and other 35,012 288 Change in deferred revenue 4,346 (92,707) Change in other liabilities 968 (6,581) (Decrease) increase in pension/post retirement liability (28,793) (40,245) Change in reserve for self-insured liabilities (7,123) (12,997) Change in operating lease obligation (251) - Change in refundable advances under Federal Student Loan Program (8) (49) Net cash and cash equivalents used in operating activities (1,565) (2,276) Cash flows from investing activities Proceeds from sale of investments 454,112 481,023 Purchases of investments (439,371) (476,131) Return on unexpended bond proceeds (79) 1,989 Proceeds from property/land sale 18,392 - Purchases and renovations of long-lived assets (16,503) (12,248) Restricted contributions (8,439) (2,881) Net cash and cash equivalents provided by/(used in) investing activities 8,112 (8,248) Cash flows from financing activities Proceeds from notes payable 45,000 15,000 Payment on notes payable (45,000) (15,000) Proceeds from bonds payable - - Payment on bonds payable (2,798) (2,545) Payment on interest rate swap - - Principal payments on financing lease obligations (9,490) (6,945) Student loans issued (483) (825) Student loans collected 1,883 1,564 Proceeds from restricted contributions 8,439 2,881 Net cash and cash equivalents used in financing activities (2,449) (5,870) Net (decrease) increase in cash and cash equivalents 4,098 (16,394) Cash and cash equivalents at beginning of year 28,900 45,294 Cash and cash equivalents at end of period $ 32,998 $ 28,900 Supplemental cash flow information: Cash paid for interest $ 23,143 $ 21,650 Supplemental non-cash investing activities: Acquisition of equipment under financing leases 34,942 6,784 Donated long-lived assets 12,727 - Stock distributions 2,434 1,560 The accompanying notes are an integral part of these consolidated financial statements. 6

1. Summary of Significant Accounting Policies (a) Description of the University The Howard University (Howard) is a private, nonprofit institution of higher education (the University) which also operates Howard University Hospital (the Hospital) located in Washington, DC. The University provides academic services in the form of education and training, primarily for students at the undergraduate, graduate and postdoctoral levels, and performs research, training and other services under grants, contracts, and similar agreements with sponsoring organizations, primarily departments and agencies of the United States government. Howard also provides patient healthcare services at the Hospital and by certain members of the University s faculty as part of its academic clinical activities. The consolidated financial statements also include the activities of Howard University International (HUI), Howard University Global Initiative Nigeria, LTD/GTE. (HUGIN), Howard University Technical Assistance Program in Malawi Limited (HUTAP), and Howard University Global Initiative South Africa NPC (HUGISA), wholly-owned subsidiaries of the University. The activities and balances of these entities are reflected in the statements of activities and statements of position, and any intercompany balances have been eliminated in consolidation. The University conveyed its fee simple interest in the properties known as the East Tower, the West Tower, Drew Hall and Cook Hall to Howard Dormitory Holdings 1, LLC by Special Warranty Deed recorded in January, 2017. The Howard SPE is wholly-owned by the University. The Hospital has a 49% joint venture interest in the Howard University Dialysis Center LLC (LLC). Howard accounts for its interest in the LLC using the equity method which requires Howard to record a proportional share of the LLC s net income or loss as increases and decreases to the initial investment are received. Howard is recognized as an organization exempt from Federal income tax under Section 501(a) of the Internal Revenue Code (the Code) as an organization described in Section 501(c)(3) whereby only unrelated business income, as defined by Section 512(a)(1) of the Code, is subject to Federal income tax. Any unrelated business income tax generated by Howard is recorded as income tax using the liability method under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the period that the deferred tax asset or liability is expected to be realized or to be settled. As of June 30, 2018, and 2017, Howard had no 7

unrelated business income and therefore had no deferred tax assets or liabilities. In addition, Howard analyzed its tax positions for the years ended June 30, 2018 and 2017 and determined that there were no uncertain tax positions that would have a material impact on Howard s consolidated financial statements. (b) (c) Basis of Presentation The consolidated financial statements of Howard have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Howard has elected to show summarized comparative financial information with respect to the statement of activities for the year ended June 30, 2017. Such summarized information is prepared in a manner consistent with the statement of activities information from which it was derived. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates affect the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts realized or paid could differ significantly from the amounts reported for these assets and liabilities. Significant items subject to such estimates and assumptions include the carrying value of receivables, accumulated depreciation related to property, plant and equipment and investments whose fair values are not readily determinable; and the adequacy of reserves for professional liabilities, retirement benefits, self-insured health benefits, self-insured workers' compensation and environmental liabilities. (d) Cash and Cash Equivalents Short-term investments with maturities at date of purchase of nine months or less are classified as cash equivalents, except that any such investments purchased with funds on deposit with bond trustees, or with funds held in trusts or by external endowment investment managers are classified as Deposits with trustees or Investments, respectively. Cash equivalents include certificates of deposit, short-term U.S. Treasury securities and other short-term, highly liquid investments and are carried at approximate fair value. Howard classifies any cash or money market accounts held by external managers as investments, as these amounts are not readily available for operations and are part of the long-term investment portfolio. 8

(e) Investments Investments are segregated between operating, restricted and endowment investments and deposits with trustees on the consolidated statements of financial position, all of which are stated at fair value and defined as follows: Operating Investments represent investments free of any donor or lender imposed restrictions. These investments are short-term in nature and can be liquidated at the discretion of the Board of Trustees (the Board ) to meet operational demands. Restricted Investments represent non-endowed investments whose principal and or income are restricted by external sources, including liquidation restrictions. The use of the principal and interest of these investments is not subject to the discretion of the Board and as such they are not available to meet the operational needs of the University. Endowment Investments represent the pooled endowment and the Federal matching endowment investments. The endowment investments are spread across various asset categories with the use of the income from these investments restricted based on stated donor stipulations. The fair values of Howard s investments are determined by the most relevant available and observable valuation inputs as defined in Note 5. Purchases and sales of securities are reflected on a trade-date basis. Gains and losses on sales of securities are based upon average historical value (cost of securities purchased or the fair market value at date of gift, if received by donation). Dividend and interest income are recorded on an accrual basis. Accrued but unpaid dividends, interest and proceeds from investment sales at the report date are recorded as investment receivables. Realized and unrealized investment gains and losses are allocated in a manner consistent with interest and dividends, to either unrestricted, temporarily restricted or permanently restricted net assets (distinguished between operating and non-operating), based on donor intent or lack thereof. Such amounts may be expended for operations, for specified donor purposes if temporarily restricted, or held in perpetuity at the donor s request. Realized and unrealized investment gains and losses on loan funds are accumulated in permanently restricted net assets. Operating investment income includes interest, dividends and operating investment returns. This balance is calculated using operating investments as a percentage of total Level 1 investments in common stock and mutual funds. 9

(f) Receivables and Revenue Recognition (1) Contributions are recognized as revenues in the period received. Conditional promises to give are not recognized until the conditions on which they depend are substantially met. There were no conditional contributions in 2018 or 2017, respectively. Contributions of assets other than cash are recorded at their estimated fair value at the gift date. Howard has elected not to recognize or capitalize contributions of works of art, historical treasures, and similar assets held as part of collections. Contribution revenue for fiscal years ended June 30, 2018 and 2017 are shown below: CONTRIBUTIONS REVENUE 2018 2017 Unrestricted $ 17,904 $ 5,265 Temporarily restricted 6,768 7,578 Permanently restricted 8,439 2,896 TOTAL $ 33,111 $ 15,739 Contributions to give with payments to be received after one year from the date of the consolidated financial statements are discounted. Allowance is made for creditworthiness of the donors, past collection experience, and other relevant factors. Tuition and fees from student services are recognized ratably over the academic time period to which they apply. A portion of tuition and fees charged in the current fiscal year for the summer term is deferred and recognized in the following fiscal year due to summer sessions between May and July crossing fiscal years. To incentivize students to earn their degree early or on-time, the University has established a tuition rebate, whereby on-time or early graduates are eligible to receive a 50 percent discount on their tuition for their final semester. The rebate is applicable to direct payments made to the University by the student or family toward the final semester s tuition. NET TUITION REVENUE 2018 2017 Gross tuition and fees $ 259,701 $ 247,142 Financial aid: Merit 68,463 57,775 Need 9,670 15,083 Talent 7,999 8,174 Other 29,938 18,243 Total financial aid $ 116,070 $ 99,275 TOTAL NET TUITION $ 143,631 $ 147,867 10

Student receivables represent unpaid tuition and fees assessed in current and prior periods that are generated when a student registers for classes through the University s formal registration process. Howard maintains a policy of offering qualified applicants admission to the University without regard to financial circumstance. Student financial aid is generally fulfilled through a combination of scholarships, fellowships, loans and employment during the academic year. Tuition and fees are recorded net of discounts for scholarships (merit, talent, and need based), fellowships, graduate remission and employee tuition remission. Funding for financial aid may come from donor designated sources or from unrestricted operations and assets. Financial aid for fiscal years ended June 30, 2018 and 2017 was $116,070 and $99,275, respectively. (2) Other income represents income from activities other than those that are ongoing and central to Howard s core business operations and is recognized as revenue in the period it is earned and collectible. (3) Federal appropriation revenue is recognized when received and expended. Howard receives a Federal appropriation that can be used for support of the University s educational mission, a portion of which is held as a temporarily restricted term endowment which is required to be held for 20 years. For fiscal years ended June 30, 2018 and 2017, Howard received 29% and 29%, respectively, of its revenue support from the Federal appropriation. The $3,405 and $3,405, receivable for the fiscal years ended June 30, 2018 and 2017, respectively, represents the portion to be collected on the Federal term endowment as defined in Note 13. (4) Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors and bad debt expense. The Hospital and University faculty physicians have arrangements with third-party payors that provide for payments at established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per-diem payments. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Patient and third party healthcare payor receivables are the amount due for patient care services rendered by the University s Faculty Practice Plan (FPP) and the Hospital. 11

NET PATIENT SERVICE REVENUE 2018 2017 Gross Revenues $ 713,815 $ 682,710 Third-party settlement revenue 60,309 63,702 Contractual allowances and adjustments (488,292) (444,653) Charity services (10,445) (4,200) Bad debt (42,314) (51,234) Total net patient service revenue $ 233,073 $ 246,325 % of contractuals and charity services of gross revenues 70% 66% Grants and contracts revenue is recognized when reimbursable expenses are incurred (for cost plus contracts) or when deliverables or milestones are met (for fixed price contracts). These revenues include recoveries of eligible direct expenses and indirect costs for facilities and administration, which are generally determined as a negotiated or agreed-upon percentage of direct costs. Receivables under research grants and development agreements represent the amounts due from Federal, state, local, private grants, contracts and others. GRANTS AND CONTRACTS REVENUE 2018 2017 Reimbursement of direct expenses $ 45,413 $ 45,439 Recovery of indirect costs 7,838 8,324 Total grants and contracts revenue $ 53,251 $ 53,763 Indirect costs recovery as a % of direct costs 17% 18% Grants and contracts revenue by type is detailed in the table below. GRANTS AND CONTRACTS REVENUE BY TYPE 2018 2017 Research $ 34,839 $ 35,688 Training 11,665 9,490 Service/other 6,747 8,585 Total grants and contracts revenue by type $ 53,251 $ 53,763 12

(5) Auxiliary services revenue is generally recognized when services are rendered or as activities have been completed. Auxiliary receivables are comprised primarily of amounts due from advertisers on Howard s commercial radio station WHUR and bookstore vendors. AUXILIARY SERVICES REVENUE 2018 2017 Student housing $ 7,358 $ 12,925 Meal plans 16,457 12,841 Radio station 8,732 8,461 Bookstore 682 672 Parking fees 1,844 1,875 Vending sales and fees 1,006 888 Ticket sales 614 537 Licensing 150 109 Other 602 593 Total auxiliary services revenue $ 37,445 $ 38,901 (6) Real property revenue is comprised of income and gains from real estate transactions including lease income and is recognized as revenue in the period it is earned and collectible. Revenue recognition for real property lease income transactions is disclosed in further detail in Note 10. (7) Notes receivable represent loans the University extended to students from institutional resources and Federal Student Loan programs with outstanding balances, which includes Federal Perkins Loans. Management regularly assesses the adequacy of the allowance for credit losses on student loans by performing ongoing evaluations of the student loan portfolio, including the financial condition of specific borrowers, the economic environment in which the borrowers operate, and the level of delinquent loans. Howard s Perkins receivable represents the amounts due from current and former students under the Federal Perkins Loan Program. Loans disbursed under this Program are able to be assigned to the Federal Government in certain non-repayment situations. In these situations, the Federal portion of the loan balance is guaranteed. 13

(g) Changes in Accounting Principle ASU 2015-03 Interest Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs requires that debt issuance costs related to a recognized debt liability be presented in the statements of financial position as a direct deduction from the carrying amount of that debt liability. The ASU was effective for fiscal years beginning after December 15, 2015. This is a change from previous treatment where debt issuance costs were reported as an asset in the statement of financial position. In fiscal year 2017, Howard adopted the new principle and has in accordance, reclassed the debt issuance costs from other assets and deducted it from the bonds payable liability. For fiscal years ending 2018 and 2017, Howard had debt issuance costs related to the 2010, 2011 and 2016 bonds of $4,428 and $4,683, respectively. (h) Inventories, Prepaids and Other Assets Inventories consist primarily of medical supplies, and are recorded at the lower of cost or realizable value on a first-in, first-out basis. Prepaids consist primarily of insurance, dues, subscriptions and other fees and are amortized over the useful period. Other assets consist primarily of deferred health charges, intellectual property, beneficial interest trust and investment interest in a dialysis joint venture (see Note 22). (i) Long-Lived Assets Long-lived assets include property, plant and equipment balances for Howard. Property, plant and equipment are stated at cost or at fair value if received by gift, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful lives for fiscal years reported are as follow: Land improvements Building and building improvements Furniture and equipment Software Library books 0-25 years 5-40 years 3-20 years 3-10 years 10 years Property, plant and equipment is capitalizable when the unit cost is equal to or exceeds $3 and has a useful life of more than one year. Title to certain equipment purchased using funds provided by government grants or contracting agencies is vested with Howard, and therefore is included in 14

reported property balances. Such assets are subject to transfer or disposal by the relevant cognizant agency. Interest costs eligible for capitalization are the costs of restricted borrowings, less any interest earned on temporary investment of the proceeds of those borrowings, from the date of borrowing until qualifying assets are placed in service for their intended use. The recorded values of certain properties include the fair value of any environmental remediation necessary to meet contractual or regulatory requirements for disposal or remediation of the property. This primarily pertains to the cost of removal and disposal of asbestos. (j) Compensated Absences Howard records an amount due to employees for future absences, which are attributable to services performed in the current and prior periods and subject to a maximum carryover. This obligation is recognized on the consolidated statements of financial position as part of accounts payable and accrued expenses. At fiscal years ended June 30, 2018 and 2017 the obligation was $4,840 and $4,444, respectively. (k) Other Liabilities Other liabilities are comprised primarily of unclaimed property, student deposits, deposits held in custody for others, reserves for legal and other contingencies and miscellaneous items. (l) Pension and Post-Retirement Benefits The funded status of Howard s pension benefit (the Plan ) is actuarially determined and recognized in the consolidated statements of financial position as either an asset to reflect an overfunded status, or as a liability to reflect an underfunded status. Howard s actuarially determined post-retirement benefit obligation is recognized on the consolidated statements of financial position as a liability. Howard follows the Internal Revenue Service (IRS) guidelines in the administration of the Plan. (m) Reserves for Self-Insured Liabilities The reserve for self-insured liabilities is comprised primarily of amounts accrued for asserted medical malpractice and worker s compensation claims and includes estimates of the ultimate cost to resolve such claims. The reserve also includes an 15

estimate of the cost to resolve unasserted claims that actuarial analyses indicate are probable of assertion in the future. Medical malpractice claim reserves are stated at an undiscounted amount. (n) Refundable Advances Under Federal Student Loan Program Funds provided by the United States Department of Education under the Federal Student Loan Programs are loaned to qualified students and may be re-loaned after collections. The portion of these funds provided by the Department of Education are ultimately refundable to the Department of Education and are reported as liabilities in the consolidated statements of financial position and as cash flows from financing activities in the consolidated statements of cash flows. Loans issued to students are reported as part of receivables in the consolidated statements of financial position. (o) Net Assets Net assets are classified based on the existence or absence of donor-imposed restrictions as follows: Unrestricted Net assets that are not subject to donor-imposed stipulations. Temporarily restricted Net assets subject to donor-imposed stipulations that either expire by the passage of time or can be fulfilled by actions pursuant to those stipulations. Permanently restricted Net assets subject to donor-imposed stipulations that do not expire with time or University action. Generally, the donors of these assets permit Howard to use all or part of the income earned on related investments for general or specific purposes. Contributions are reported in the appropriate category of revenue, except that contributions with donor-imposed restrictions met in the same fiscal year are included in unrestricted revenues. Expirations of temporary restrictions (i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as releases from temporarily restricted net assets to unrestricted net assets. Donor restrictions on gifts to acquire long-lived assets are considered fulfilled in the period in which the assets are acquired or placed in service. 16

(p) Measure of Operations Howard includes in its measure of operations all revenue and expenses that are integral to its continuing core program services with the key objective being predictability of indicated results. Such measures include the gains and losses from real estate related transactions which were previously recorded as nonoperating items. Howard uses a spending rate methodology to determine the amount of endowment assets allocated to operations in a given year. Nonoperating income and expenses include realized and unrealized appreciation (depreciation), investments, changes in retirement plan liabilities due to market factors, restructuring credits and (costs) that do not pertain to continuing core program services. (q) New Accounting Pronouncements In August 2018, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) number 2018-13 Fair Value Measurement (Topic 820) Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the Concepts Statement, including the consideration of costs and benefits. Howard is currently evaluating the impact of this amendment on its financial statements. In June 2018, the FASB issued ASU number 2018-08 (Topic 958), Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The amendments in this Update should assist entities in 1.) Evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of Topic 958, Not-For-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and 2.) Determining whether a contribution is conditional. Howard is currently evaluating Topic 958 and its impact on its fiscal year 2019 financial statements. In January 2018, the FASB issued ASU number 2018-01 (Topic 842), Leases: Land Easement Practical Expedient for Transition to Topic 842. The ASU provides optional transition practical expedient for the adoption of ASU 2016-02 Leases and clarifies that new or modified land easements should be evaluated under ASU 2016-02 once an entity has adopted the new standard. Howard early adopted ASU 2016-02 Leases in fiscal year 2016 and will apply the provisions of ASU 2018-01 in its current reporting where applicable. In July 2017, the FASB issued ASU number 2017-11 (Topic 815), Derivatives and Hedging. The ASU addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of 17

certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Howard is currently evaluating Topic 815 and planning for the implementation in fiscal year 2019. In May 2017, the FASB issued ASU number 2017-10 (Topic 853), Service Concession Agreements: Determining the Customer of the Operations Services. Topic 853 provides guidance for operating entities when they enter into a service concession arrangement with a public-sector grantor. Howard has reviewed the guidance under Topic 853 and has determined that its service concession agreements do not fall under this guidance and is not applicable to its operations. In March 2017, the FASB issued ASU number 2017-07 (Topic 715), Compensation Retirement Benefits, which provides guidance on the presentation of net benefit cost in the income statement and on the components eligible for capitalization in assets. The Update requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It allows only the service cost component to be eligible for capitalization when applicable. Amounts related to the employer s results of operations shall be disclosed for each period for which a statement of income is presented. Amounts related to the employer s statement of financial position shall be disclosed as of the date of each statement of financial position presented. Howard is currently evaluating and assessing the implementation of this new pronouncement, which will be adopted in fiscal year 2019. In February 2017, the FASB issued ASU number 2017-05 (Topic 610-20), Other Income Gains and Losses from the Derecognition of Nonfinancial Assets, which provides clarity to the scope of Subtopic 610-20, Other Income Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets. The amendments define the term in substance nonfinancial asset, in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20. Howard is currently evaluating and assessing ASU number 2017-05 to determine whether it applies to its operations. In January 2017, the FASB issued ASU number 2017-02 (Subtopic 958-810), Notfor-Profit Entities Consolidation. The ASU provides guidance on when a not-forprofit entity (NFP) that is a general partner or a limited partner should consolidate 18

a for-profit limited partnership or similar legal entity once the amendments in Accounting Standards Update No. 2015-02 are effective. Subtopic 958-810 provides general guidance in Subtopic 810-10 on when NFP limited partners should consolidate a limited partnership. The update applies to an NFP that is a general partner or a limited partner of a for-profit limited partnership or a similar legal entity. A similar legal entity is an entity such as a limited liability company that has governing provisions that are the functional equivalent of a limited partnership. In those entities, a managing member is the functional equivalent of a general partner, and a non-managing member is the functional equivalent of a limited partner. Howard is currently evaluating and assessing ASU number 2017-02 to determine whether it applies to its operations due to the entities created as part of the real estate transactions. In December 2016, the FASB issued ASU number 2016-18 (Topic 230), Statement of Cash Flows. The ASU provides guidance on all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. Howard is currently evaluating Topic 230 and planning for the implementation in fiscal year 2019. In August 2016, the FASB issued ASU number 2016-15 (Topic 230), Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. The ASU provides guidance on all entities, including both business entities and not-forprofit entities that are required to present a statement of cash flows under Topic 230. This Update provide guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs, (2) Settlement of Zero- Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing, (3) Contingent Consideration Payments Made after a Business Combination, (4) Proceeds from the Settlement of Insurance Claims, (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies, (6) Distributions Received from Equity Method Investees, (7) Beneficial Interests in Securitization Transactions, and (8) Separately Identifiable Cash Flows and Application of the Predominance Principle. Howard has assessed and evaluated ASU number 2016-15 and determined it is applicable to its operations. These new pronouncements will be adopted in fiscal year 2019. 19

In August 2016, the FASB issued ASU number 2016-14 (Topic 958), Not-for-Profit Entities. The ASU provides guidance improvements that address many, but not all, of the identified issues about the current financial reporting for not-for-profit entity s (NFP s) such as liquidity, financial performance, and cash flows so useful information can be provided to donors, grantors, creditors, and other users of financial statements. This Update makes several improvements to current reporting requirements that address, among others, the following problems: (1) Complexities about the use of the currently required three classes of net assets that focus on the absence or presence of donor-imposed restrictions and whether those restrictions are temporary or permanent, (2) Deficiencies in the transparency and utility of information useful in assessing an entity s liquidity caused by potential misunderstandings and confusion about the term unrestricted net assets and how restrictions or limits imposed by donors, grantors, laws, contracts, and governing boards affect an entity s liquidity, classes of net assets, and financial performance, (3) Inconsistencies in the type of information provided about expenses of the period, and (4) Impediment of preparing the indirect method reconciliation if an NFP chooses to use the direct method of presenting operating cash flows. This new pronouncement will be adopted in fiscal year 2019. In January 2016, the FASB issued ASU number 2016-01 (Subtopic 825-10), Financial Instruments Overall. The ASU provides guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Board also is addressing measurement of credit losses on financial assets in a separate project. The updates affect all entities that hold financial assets or owe financial liabilities. The amendments in this Update make targeted improvements to generally accepted accounting principles (GAAP) as follows: (1) Require equity investments to be measured at fair value with changes in fair value recognized in net income, (2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) Eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities, (4) Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (5) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (6) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (7) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements, and (8) 20

Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity s other deferred tax assets. Howard is currently evaluating and assessing ASU number 2016-01 to determine whether it applies to its operations due to the entities that either hold investments or debt. In April 2015, the FASB issued ASU number 2015-04 (Topic 715), Compensation Retirement Benefits: Practical Expedient for the Measurement Date of an Employer s Defined Benefit Obligation and Plan Assets. The ASU provides guidance on reducing the complexity in accounting standards by identifying, evaluating, and improving areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. A reporting entity with a fiscal year-end that does not coincide with a month-end may incur more costs than other entities when measuring the fair value of plan assets of a defined benefit pension or other postretirement benefit plan. Howard has assessed and evaluated ASU number 2015-04 and determined it is applicable to its operations. This new pronouncement was adopted in fiscal year 2017. (r) Reclassifications 2. Receivables Certain prior year amounts have been reclassified to conform to the current year s presentation. Such reclassifications did not have any impact on the University s previously reported net asset balances. Accounts receivable, prior to adjustment for doubtful collections, are summarized as follows at fiscal years ended June 30, 2018 and 2017: RECEIVABLES 2018 2017 Student $ 33,140 $ 38,372 Notes 13,467 14,867 Federal appropriation 3,405 3,405 Patients and third-party payors - Hospital 87,493 86,729 Patients and third-party payors - FPP 6,656 7,552 Patients and third-party payors - Dental 1,908 2,401 Grants and contracts 16,477 13,283 Contributions 10,726 6,052 Insurance claims 3,954 - Auxiliary services 5,190 5,600 Other 6,447 3,943 Total $ 188,863 $ 182,204 21

Other receivables include checks pending deposit at year end, rent receivables and certain vendor credit balances. Allowance for doubtful receivables is summarized as follows at fiscal years ended June 30, 2018 and 2017: ALLOWANCE FOR DOUBTFUL ACCOUNTS 2018 2017 Student $ 12,520 $ 20,531 Notes 6,421 7,315 Patients and third-party payors - Hospital 49,657 36,315 Patients and third-party payors - FPP 3,199 1,270 Patients and third-party payors - Dental 538 1,082 Grants and contracts 616 616 Contributions 3,029 2,867 Insurance claims - - Auxiliary services 506 819 Other - - Totals $ 76,486 $ 70,815 Total receivables, net $ 112,377 $ 111,389 Provision for bad debt is summarized as follows at fiscal years ended June 30, 2018 and 2017: PROVISION FOR BAD DEBT 2018 2017 Non-clinical services: Student services Notes Grants and contracts Contributions Other Total non-clinical Clinical services: Patients and third-party payors - Hospital Patients and third-party payors - FPP Patients and third-party payors - Dental Total clinical services Total provision for bad debt $ 6,276 $ (1,614) (788) 1,532 - (500) 162 812 22 (7) $ 5,672 $ 223 36,292 38,245 6,221 12,905 (199) 84 $ 42,314 $ 51,234 $ 47,986 $ 51,457 Bad debt expense of $5,672 and $223 for fiscal years ended June 30, 2018 and 2017, respectively, reflected in total operating expenses under Institutional support on the statements of activities excludes bad debt expense related to certain clinical services determined to be uncollectible. Clinical services bad debt 22

expense, as shown in the table above, has been netted against patient service revenues. Contributions receivable at June 30, 2018 and 2017 are expected to be received as follows: CONTRIBUTIONS RECEIVABLE 2018 2017 Within one year $ 4,510 $ 2,829 Between one and five years 6,960 3,355 Thereafter 394 552 Contributions receivable gross 11,864 6,736 Unamortized discount on contributions receivable (2%- 6.5%) (1,138) (684) Contributions receivable, net of discounts 10,726 6,052 Allowance for uncollectible contributions (3,029) (2,867) Contributions receivable, net of discounts and allowance $ 7,697 $ 3,185 3. Inventories, Prepaids and Other Assets Components of inventories, prepaids and other assets accounts at fiscal years ended June 30, 2018 and 2017 are as follows: INVENTORIES, PREPAIDS, AND OTHER ASSETS 2018 2017 Inventories - Hospital $ 3,784 $ 4,097 Prepaid expenses 7,738 6,755 Dialysis joint venture interest 4,753 5,054 Beneficial interest trust 5,968 5,601 Self-insured assets 6,248 7,972 Intellectual property costs 1,240 1,337 Other 552 458 Total $ 30,283 $ 31,274 23